Equity Index Update
Brad Sullivan
February 8, 2007
During my quasi sabbatical from writing this update, I kept thinking about volatility and particularly the lack of it in our current index environment. Yesterday’s price action was interesting on a variety of levels. First, there seemed to be a general feeling of “I am throwing in the towel” on the short side of the equation. Second, there appears to be a tremendous “mark ‘em up on the close” type of settlement trade that is usually found towards the tail end of run, not the beginning. The ease in which the SP futures came off their respective high zone yesterday (1456 to 1457.50) should be seen as a near term warning. For those aggressively pushing the long side of the button, marking ‘em higher has earned a strong bit of admiration and defiance from those on the sell side. However, like the guest that stays too long at the party…you don’t want to be the last one to turn out the lights. I suspect that over the next 6 trading sessions, the indices will provide plenty of support to exit from profitable long positions.
The one fly in the ointment that I have uncovered for this scenario is the general lack of overbought levels on the index front. I have enclosed graphs of all 3 indices trading at their respective all-time highs (Midcap, DJIA, Russell 2k). Notice, that only the DJIA is at elevated levels on its 200 day extension, while the Midcap and Russell are at levels below last years highs. For a true reversal in the marketplace, these readings will have to move quite a bit higher – a final melt up if you will – before the odds favor such a happening. In the meantime, I suspect that the post expiration trade will begin a potential correction in the market. However, I would be surprised at anything greater than -3 to -4 % in the SPX.
